Is food waste really so bad?

Ian Hall, COO

Food waste can be commercially astute, socially responsible, and great for customers (bear with me…) - all it takes is a change in perspective, and some basic maths. Eliminating food waste is easy - keep really low stock levels. 100% availability is equally easy - order too much. The trick is getting the balance right - ordering just enough stock to give the customer what they want, and not so much as to create waste (through products going out of date).


Balancing retailer stock-levels

Q: Why is it so hard to get the stock-levels just right?

A: Forecasting is hard.
  • Customers can be unpredictable!
  • Orders have to be done by store by day (this is harder than aggregating a forecast across the whole estate over a week or month)
  • Weather can affect sales (and even the weather forecasters have been known to get it wrong)
  • Retailers change prices for all sorts of reasons - affecting demand
  • Promotions alter demand (of the promoted SKUs, and associated or ‘victim’ lines)
  • Supply of competitor lines (or lack of) can increase sales of your products

Morning vs evening

Bread Image 3Why do so many bread departments look like this in the morning? Then empty in the evening? 

It’s normally to avoid perceived ‘waste’ at the end of the day. For the purposes of this article, I am defining waste as having 3 component parts:
  • Reduced-to-clear (RTC) ie the yellow mark-down stickers - so if a product goes from £1 down to 50p, the retailer records 50p waste.
  • Out-of-code (OOC) - when a product has gone past its sell-by date, and goes in the bin - in the above example they would count this as £1 waste.
  • Damages - product is damaged, and can either be reduced to clear (like a dented tin of beans) - in which case it is counted as RTC, or thrown away - and wasted at £1.

Changing the perception of food waste

Q: How can we change the perception of waste from bad, to good?

A: Record waste at cost price, not retail sales price

Most retailers set their waste budgets at retail price. Simply put, if an item that sells for £1 is thrown away, it is recorded as £1 on the waste budget. Surely the reality is more complex than this, depending on what the product actually cost? If the retailer paid 50p for that product, there is an argument to say that 50p should be recorded on the waste budget.

The word ‘Waste’ has negative connotations, and can be terrible for PR, and wasting at ‘retail’ drives a set of wrong behaviours. It encourages retailers and supply-chain managers to minimise waste, often at the expense of availability.

Would it make a difference if we think of it as ‘over-supply’, rather than ‘waste’?

Here’s an example of the in-store bakery baguette. It makes for a good example because it is easy to flex supply - shove more flour in the mixer (I’m no expert), and it is very low cost to produce.

An in-store bakery baguette:

  • Cost price 10p (for the purposes of simple maths)
  • Retail price £1.00
  • Profit 90p (90%)

Scenario 1:

  • Bake 100, Sell 100, Waste 0
  • Profit: £90
Scenario 2:
  • Bake 200, Sell 150, Waste 50
So what’s the profit?
  • Waste at retail price: Profit £85 (sell 150 x 90p) - (waste 50 x 100p)
  • Waste at cost price: Profit £130 (sell 150 x 90p) - (waste 50 x 10p)

In scenario 2, accounting for waste at retail price makes this look like a bad decision, but wasting at cost price it looks like a great decision - but it’s the same behaviour - just a different way of calculating the impact.

(The other problem in scenario 1 is that by going out of stock earlier in the day, you will never know what you could have sold - the best algorithm will never be 100% accurate)

So by looking at true profit, rather than ‘perceived waste value’, you get:

  • Happy customers (a full range of products to shop)
  • 50 baguettes that could go to charity
  • More profit!

Social responsibility

What to do with the 50 wasted ones? There are now lots of socially responsible solutions to over-stocks of food products:

Tesco initiative:

There are lots of other charitable solutions such as:

One big caveat: This doesn’t apply across all products to the same degree - it depends on the margin (the higher the % margin, the more you can over-supply), but the principle is the same.

  • Encourage testing - by understanding true demand, your forecasts will become more accurate
  • Think like an accountant - record waste based on the true cost
  • Continuous improvement will level the scales - (we are not advocating deliberately over-producing in the long-run)

Food waste at store level

An additional data perspective - get into the detail, and look at the stores:

As well as recording waste at cost the other problem is how retailers look at their data. Due to the difficulty of consuming large tables of data, buyers are forced to look at waste in aggregation, and not at store level. Often high wasting products are only high wasting in some stores, and correcting these stores (either by amending forecasts, facings or de-listing altogether) can have a huge impact on waste reduction.
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Example: high-end steak comes in pack-size of 12, with shelf life of 7 days, sells at £8 (RRP)100 Stores (high affluence, high traffic, weekly shop) sell (at full price) 24 units a week, so have zero waste:

  • Sales Value £9,600; Waste (at Retail) £0
60 Stores (low affluence, low traffic, weekly shop) sell (at full price) 8 units a week, and another 4 at 40% reduction (this is when this becomes the cheapest steak in the shop)
  • Sales Value £4,900; Waste (at Retail) £760
80 Stores (high affluence, high traffic, convenience food-to-go) sell (at full price) 4 units a week, and another 3 at 40% reduction and bin 5 (you can’t send in half a pack)
  • Sales Value £4,700; Waste (at Retail) £4,000 (RTC £800 + Bin £3,200)
Aggregate Picture:
  • Sales Value £19,200; Waste (at Retail) £4,760; Waste (% of Sales) 25%
The choice will be to “live with the waste” as we hear that many customer love this product, or de-list from the range (annoying those customers). If we could see (and make sense of) the data at the lower (store) level we could remove it from the convenience stores selectively (there will be some that have some evening meal trade), and the lowest traffic low affluence stores.

With this shift in perspective, coupled with the ability to look at underlying data, it is easy to have happier customers and increased profits.

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